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RENTALS - 5 years In LandLord Land!

I know that many of you that visit this web site are either owners of rentals, landlords or those who think that with this economy and the housing issues that all face, that they would like to invest in rental properties and become a Landlord themselves. Well, what I have done on this page is to take one of my properties and give you a “HISTORY” of this rental property over a 5 year period including the year 2007-2011, to give you a glimpse of what you might face!

The Property

This is a two story, two family home on about a 50 by 140 foot lot in a fairly good size Mid-western City, Grand Rapids, Michigan to be exact. Back in 1997, I purchased this home through a VA Land contract, wherein I laid out 10% down and was awarded a Land Contract on this home and was held that way for a few years. I originally bought this home for about 47K; it had a large 1000+ sq foot 2 bedroom apartment on the main level with a full basement and laundry area, and another very large One Bedroom apartment on the 2nd level which has a private entrance. The property also has a one stall detached garage. I allow the upstairs tenants use of the garage for storage, etc., and the tenants on the main level are given full use of the basement.

To give you a little about the history, I initially redecorated both upstairs and downstairs at time of purchase and within 3 months had both units rented out. During the course of the next couple of years I put on a new roof and then about 2005, I refinanced not only to get a better interest rate but took out enough to make some major improvements to the building which including new replacement windows throughout the 2 story dwelling. I currently have a payment of about $573 a month on a mortgage which includes escrow for taxes and Insurance. The Electric and natural gas are separate utilities for each unit and paid for by each tenant, while the Water/Sewer is one system, paid for by the landlord, which is ME!

The Property peaked out in value just before the housing bubble burst at about 119K but now is probably worth about 99K. Still with an initial purchase price of 47K, I am still safe at present and look forward to the values rebounding.

To make numbers easier to understand let’s say the rents were like this: $550/month for the lower unit plus utilities (gas/electric) and $425/month for the upper unit plus the same utilities for the whole 5 year period. Did I make money? Let’s see.

BY THE NUMBERS!

Total possible Rent for 60 Months @975/month $58500

Total Rent collected for the 60 Month period $54825

That last figure divided into the first figure gives me an occupancy rate of 93.7%. In other words I had it rented 93.7% of the time during the five year period from 2007-11. I think any figure over 90% is an excellent rate.

EXPENSES

Before you go further, about
Rentals, you might want to check this page?
I did have to pay for Water/Sewer and occasionally when the unit(s) might be empty have to pay extra utilities in gas and electric, but total it was like this, and I will tell you that Grand Rapids Water/Sewer Rates are “horrendous”:

Water/Sewer for 5 years $4948 avg. $82.46/month

Gas & Electric for Vacancy $529 avg. $8.81/month

Total Utilities $5477 avg. $91.27/month

Now if I stopped at this point you might say ‘SUPER’, let’s see 975/month minus payment of 573/month minus 92/month for utilities, and Whoopee! I am making $311 a month in positive cash flow and you would be basically correct but there are pluses and minuses to that.

PLUSES!

I was able to write off my taxes on this unit an average of $3121 each year in Mortgage interest, along with the $669 average each year that I paid for house insurance during this 5 year periods. I also was able to deduct and average yearly property tax of $2120 a year while paying down the principal on my mortgage about $3900 dollars. As you can see these expenses alone total more than the positive cash flow that I have. So it can reduce my tax liability on my other income too, made during the course of the year. This also did not include yearly depreciation deducted from income, another plus!

MINUSES

Don’t forget that Grass has to be cut, repairs made and units kept up with paint, flooring etc., while you operate these properties. Here is the nitty and the gritty for these past 5 years.

Note we said a positive cash flow of about$311 a month, that would have given me $18,800 over the five years to work with. Well what did I spend to keep these units going for this typical 5 years, and remember I cut my own grass, paint my own walls, etc.

During the 5 years period the total I spent to keep up the units was $5748. Now that may seem high to some and for a couple of reasons it is. First of all I had to replace 2 Stoves and 2 Refrigerators during that period, all reconditioned used but that took up $1054 of that figure. I also spent $600 on HVAC repairs and over $1000 on new carpet which will be used for years. But even at these figures, I think this gives you an HONEST look at the whole enchilada!

The Bottom Line, or To Sum it Up!

What you have to remember is, sure, this is a property which in the long run with a 10% (about $4700) down payment and even with the current depressed housing economy is still worth more than double what I paid for it. But usually, we self employed types don’t have 401K’s or Roth IRA’s, but these investments can help ensure our futures. In a few years this home will be PAID FOR! Then will property values be up again? I certainly believe so and my 4.7K down payment may pay me back 25-30 times as much!